July 09, 2016

The stormy Theranos saga took another turn late Thursday when the company announced that federal regulators were banning founder Elizabeth Holmes for two years from operating a blood-testing laboratory. The Centers for Medicare and Medicaid Services also pulled approval of the company’s California laboratory.

Theranos had already voided two years of results from its Edison blood-testing device. It is increasingly unclear whether the secretive company’s microfluidics technology, which required only a finger prick instead of a needle jab, ever actually worked.

I’m in no way surprised. After 25 years of tracking and investing in startups, I’ve learned that entrepreneurs will do anything to make their company successful: persuade, cajole and even put the fab in fabricate.

Entrepreneurs, it seems, all want to emulate the late Steve Jobs—even his fashion, given Ms. Holmes’s penchant for black mock turtlenecks. At Apple and Next and Pixar, Jobs emanated what became known as a “reality distortion field.” His overpowering charisma would convince workers, developers and investors to come around to his view of where the world was going.

There was only one Steve Jobs, but other entrepreneurs try their own Jedi mind tricks, attempting to use The Force to influence the weak. (In Silicon Valley, “Star Wars” is regarded as a documentary.) Sadly, the journey from charisma to coercion to lying is quick and often complete.

I’ve been lied to plenty. As an analyst, I once visited a still-prominent Silicon Valley CEO. His stock had taken a beating recently, but I liked the firm’s prospects and had come to evaluate the opportunity. He looked me in the eye and said, as I recall, “I don’t know why anyone would recommend our stock right now.” Then he unloaded all the things that were about to go wrong. Within two months, on better revenue, the stock had almost doubled. It turned out that when I had visited, the company was pricing options for the CEO and other executives. Had I recommended the stock, the exercise price might have been higher, eating into their take.

During the dot-com frenzy, I recall sitting through an initial public offering presentation for eToys.com. A chart of projected e-commerce spending overall showed quarter-by-quarter growth. But the graph with revenue for eToys itself inexplicably switched to six-month numbers. I passed on the deal; they were hiding something. No matter, the public got duped and in May 1999 the stock quadrupled on the first day of trading to a $7.8 billion valuation. The company would file for bankruptcy 22 months later.